Morning Run … November 17, 2009

Key News

 

* International Purchases of Long-Term U.S. Assets Rose  (Bloomberg)

* Fed’s Yellen: Rate Policy May Be Used Against Asset Bubbles (Bloomberg)

* Obama Urges China to Heed Commitment on Currency Appreciation (Bloomberg)

* Japan Deflation Concern Rises Even as Growth Quickens  (Bloomberg)

 

The Event Agenda

Morning Run-Down

 

There has been a lot of information to digest over the weekend and through the New York trading session this morning.  After looking like another leg of the dollar sell-off was underway yesterday — as stocks broke to new highs and the dollar index fell to 2009 lows — today the dollar is very bid and decoupling from a fairly quiet stock market.

 

The dollar commentary by Bernanke yesterday in his speech at the Economic Club in New York stirred the market causing a sharp rally in the dollar initially and then an even sharper reversal of that rally.  The commentary was benign, suggesting that if they take care of the economy the dollar will remain strong (a la Geithner).  But it is being digested today as dollar positive for the sole reason that Bernanke made a concerted effort to address the dollar…normally the Treasury’s territory.  Here is the excerpt…

 

“The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.”

 

Overnight, the Reserve Bank of Australia released minutes from its last central bank meeting.  They hiked rates for the second consecutive time at the meeting two weeks ago, but the minutes revealed that the board questioned whether to raise rates at all.  The market expected 50 bps, they raised by 25 bps.  The cautious tone of the minutes indicates that rates will likely stay put for the months ahead.  That’s putting pressure on the Aussie dollar today, down 1.2% after printing a new 2009 high yesterday. 

 

Obama’s visit to China didn’t yield an acknowledgement by the Chinese that they need to allow the yuan to appreciate.  Obama did comment, while in the presence of Hu Jintao, on the prior statements by the Chinese about moving toward market-oriented exchange rates.  Going into the weekend the market was pricing in a 3.5% appreciation of the yuan vs. the dollar by next year.  And today, it’s pricing in just 2.8% appreciation. 

 

Here’s a look at the charts…

Key Charts

 

The S&P 500 breached the two year descending trendline yesterday opening up for a move to 1200.  Stocks are fairly quiet today.  With the dollar moving higher today, this breakout scenario in stocks looks suspect.

 

The 1.50 area in the euro has proven very challenging, and after another run above that level yesterday the euro is trading very heavy today.  For clues on where the euro goes from here… look for a break of 1.4720 area on the downside (the white line) and 1.5063 (prior high) on the topside. 

The unemployment rate has reached levels not seen since 1983…I proposed last week in this commentary that unemployment at 10% might mean the same to consumer confidence as $4 gas?  Gas prices reached $4 in June of 2008.  As a result, consumer confidence printed its lowest level since 1980.  The UMich consumer confidence number from Friday was the biggest negative surprise on record (Bloomberg data) going back to 1999.   The market expected 71, the actual number was 66.

International purchases of long-term US securities rose in September to 133 billion, the most since October of 2008.